Technical questions
Flow-through questions
Trace depreciation, capex, a write-down and a debt-funded acquisition through all three statements, and prove it balances.
Learning objectives
- Trace a change such as +SAR 10 of depreciation through the income statement, cash flow statement and balance sheet
- Calculate the effect of capex, an inventory write-down and a debt-funded acquisition on net income, cash and the balance sheet
- Build one flow-through model that works for any scenario and balances in every column
"Depreciation goes up by 10. Walk me through the three statements" is probably the most-asked technical question in finance interviews. It tests whether you understand that the statements are one connected system, and it has a follow-up ladder: capex, a write-down, an acquisition funded with debt, then "and what happens next year?".
The method never changes, so drill it until it's automatic: income statement first (pre-tax effect, tax, net income), then the cash flow statement (start from net income, add back non-cash items, then investing and financing), then the balance sheet (cash from the cash flow statement, the other assets and liabilities that moved, equity from net income), then the check.
ΔNet income = −E × (1 − t) · ΔCash = ΔNet income + E = E × t · ΔAsset = −E · ΔEquity = ΔNet income
- E
- the non-cash expense: depreciation, amortization, a write-down or an impairment
- t
- tax rate (state it before you start; tax is assumed paid in cash in the year)
- ΔAsset
- the asset the expense uses up: net PP&E for depreciation, inventory for a write-down
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 4 graded exercises, and every other Finance Quest lesson.